Question

Nestle has not entered the dm public debt market because of concern about a likely appreciation of that currency and only wishes to be a floating-rate dollar borrower, which it can be at libor 1%. microsoft strongly prefers fixed-rate dm debt, but it must pay 1.5% more than the 6.25% coupon that nestle's dm notes would carry. microsoft, however, can obtain eurodollars at libor 0.5%. what is the maximum possible cost savings to nestle from engaging in a currency swap with microsoft if the latter provides all the savings to former?question 2 answer

a.1.25%
b.2%
c.6.25%
d.1%

Answer 1

The maximum possible cost savings to Nestle from engaging in a currency swap with Microsoft is 7.25%.

Step-by-step explanation:

To calculate the maximum possible cost savings to Nestle from engaging in a currency swap with Microsoft, we need to compare the interest rates on floating-rate dollar borrowing and fixed-rate dm debt.

Nestle can borrow at LIBOR 1%, while Microsoft has to pay 1.5% more than the 6.25% coupon rate on Nestle's dm notes. Microsoft can obtain eurodollars at LIBOR 0.5%.

Therefore, the maximum possible cost savings for Nestle would be the difference between the cost of fixed-rate dm debt (6.25% + 1.5% = 7.75%) and the cost of floating-rate dollar borrowings (LIBOR 1% - LIBOR 0.5% = 0.5%), which is 7.25%.

This calculation serves as a crucial financial evaluation in optimizing currency exchange strategies and minimizing borrowing costs.